European markets rise despite Italian political drama

LONDON: European stocks and the euro rebounded sharply Monday as investors were reassured by the speed of Italian Prime Minister Matteo Renzi's resignation after losing a crunch referendum.

The region's markets began the day in negative territory, with Milan tumbling two percent, but recovered somewhat with sentiment soothed also by the defeat of the far right in Austria's presidential election.

"The Italian referendum is the major story that will dominate market moves throughout Monday... after Renzi left his position after a bruising defeat," said GKFX analyst James Hughes.

"The initial market reaction was to the downside, but Renzi's decision to leave so quickly after the result meant that added clarity drove the euro and European equity markets to the upside."

Renzi stood by his promise to resign after his attempt to change the constitution was overwhelmingly rejected in Sunday's poll, leading to fears about the future of one of the eurozone's biggest economies.

The referendum verdict sent the European single currency crashing to $1.0506 -- the lowest level since mid-March 2015 -- before bouncing back over $1.07.

Equities also staged a recovery. Frankfurt jumped 1.6 percent on the day, Paris gained 1.0 percent and London added 0.2 percent, reversing initial losses.

Milan stocks closed down 0.2 percent, with banking shares slumping from 3 to 8 percent.

"European markets have been surprisingly resilient... as initial fears of another eurozone crisis have been largely brushed aside," said IG analyst Joshua Mahony.

"Sharp depreciation in the euro and European indices have been swiftly reversed, bearing more than a passing resemblance to the UK referendum and US election results."

Judgement call

Populists in Italy and throughout Europe rejoiced at Renzi's downfall, in the wake of anti-establishment poll shocks in both Britain and the United States.

"This referendum was seen more as a judgement call on Renzi's premiership than the reforms on offer; by rejecting the PM, Italy has displayed the same kind of anti-establishment populist sentiment that has defined 2016 for the UK and US," said Spreadex analyst Connor Campbell.

He also cautioned it presented another blow to Italy's fragile banking sector.

Last month Donald Trump won the US presidential election, while Britain voted in June to leave the European Union.

Investors were comforted somewhat after Austria's anti-immigration and euro-sceptic Norbert Hofer was defeated in his bid to become the EU's first far-right president over the weekend.

Greens-backed independent candidate Alexander Van der Bellen swept to victory on Sunday.

"The defeat of the far-right Norbert Hofer by Alexander Van der Bellen in Austria provided a chink of light for the euro, preventing its more excessive losses from sticking around for too long," noted Campbell.

Italian bond yield climbs

Italy's referendum result also sent the yield on Italy's 10-year government bonds jumping to as high as 2.062 percent -- the highest since Thursday -- from 1.902 percent Friday.

Analysts remain concerned that political instability could scupper Italy's efforts to resolve a bad loans crisis in the banking sector and spark fresh eurozone turmoil.

"Italian risk has undoubtedly increased with the banks no longer the only major threat," said Craig Erlam at currency trading group Oanda.

"Italy now poses a great threat to the European project and with elections now likely to take place next year, alongside those in the other two largest economies in the eurozone, there's likely to be a lot more talk once again of a break-up with 'Itexit' this time possibly being the straw that breaks the camel’s back."

US stocks higher early Monday thanks to gains by petroleum-linked equities, with investors shrugging off the Italian referendum adding risk to eurozone politics.